China Injects $140b into Market, in Major Policy Package to Boost Economy

RRR, interest rate cuts show resolve to ensure steady recovery: economists

By Wang Cong, Feng Fan and Qi Xijia

Jan 24, 2024 11:08 PM

A view of the PBC building in Beijing Photo: VCG

Chinese policymakers on Wednesday issued a package of major policies to boost the country's economy, including cutting the amount of cash that banks are required to hold as reserves to inject nearly $140 billion into the economy and lowering refinancing and rediscount rates, signaling that China is stepping up efforts to ensure stable economic recovery in 2024.

At a closely watched wide-ranging news conference, central bank officials addressed various hot topics facing the Chinese economy from the property sector to the capital market to local government debt, and they made it clear that they have plenty of room for policy maneuvers to tackle those challenges. The growing policy signals evidently lifted market sentiment, as Chinese stocks on Wednesday reversed several days of declining.

Calling the policy measures "rare" and "exceeding expectations," Chinese economists said the moves marked a significant easing in China's monetary policies and underscored policymakers' determination as well as capabilities to keep the world's second-largest economy on a steady recovery trajectory in 2024, despite lingering downward pressure. 

In the most significant move, Pan Gongsheng, governor of the People's Bank of China (PBC), China's central bank, announced at the press conference on Wednesday that China will cut the reserve requirement ratio (RRR) by 50 basis points from February 5. The move will inject 1 trillion yuan ($139.5 billion) of long-term liquidity into the market. 

The RRR is a major policy tool for the PBC to manage liquidity. Wednesday's announcement marks the first RRR cut in 2024. The PBC cut the RRR twice in 2023, with the last cut taking place in September 2023. 

In addition, Pan announced on Wednesday that the PBC will lower the interest rates of relending and rediscount supporting agriculture and small firms by 25 basis points to 1.75 percent from Thursday. The moves will help drive down the benchmark loan prime rate (LPR). The PBC had left the LPR unchanged earlier this week, prompting some media speculations. 

Some economists called the RRR and rate cuts on the same day "rare" and "exceeded market expectations."

"There had been expectations for the PBC to cut the RRR, but the intensity was larger than expected," Zhou Maohua, a macroeconomic analyst at Everbright Bank, told the Global Times on Wednesday. "It shows that monetary policy has been significantly ramped up to support the real economy, sending a strong signal of the central bank's resolve to promote economic stability and improvement."

In additional to the RRR and rate cuts, the PBC also announced several major policy measures at the Wednesday press conference. Notably, Pan said that China's monetary policy has ample room to maintain reasonably sufficient liquidity and support large-scale centralized issuance of government bonds.

Xu Gao, chief economist with Bank of China International, said that the large-scale issuance of government bonds helps financing difficulties facing local governments as well as supports investment in infrastructure to stabilize growth. "The market reacted very positively to this signal, which reflected the central bank's clear attitude toward stabilizing growth," Xu told the Global Times on Wednesday.

Thanks to growing signals from top policymakers to stabilize capital market, Chinese stocks closed higher on Wednesday, with the Shanghai Composite Index gaining 1.8 percent and the Shenzhen Component Index up 1 percent. Notably, the Hang Seng Index in Hong Kong jumped 3.56 percent. 

Boosting confidence

Adding to positive signs for Chinese stocks, Pan, the PBC chief, also struck a confident tone over China's financial markets. 

"Currently, there is a lot of room for maneuver in macro policies, and there is a solid foundation for the stable and sound development of the capital market," Pan told the press conference, stressing that the PBC will strengthen policy adjustments to stabilize markets and confidence. 

Also notably, Pan said there was a forthcoming policy document aimed at improving property loans to support real estate developers by expanding the scope of fund use and increasing liquidity for real estate firms. The PBC will also set up a new credit market department in a bid to guide financial institutions to support financing in five areas such as technology, green development and digital economy.

Li Xunlei, chief economist at Zhongtai Securities, said that while China's economic fundamentals remain solid, market sentiment has been low. "Therefore, in order to restore confidence, we need concerted efforts from multiple government departments," Li told the Global Times on Wednesday. 

Economists said the policy package announced on Wednesday help lift confidence not only in the financial markets but also in the overall economic recovery in 2024. As China is expected to set a growth target for 2024 at the upcoming two sessions in early March, some economists are already forecasting a growth rate of around 5 percent this year. 

"As for the growth target this year, we expect that it will be around 5 percent, which is a relatively ambitious target, and we also expect the actual growth rate to be around 5 percent," Xu said, noting that though lower than last year's growth rate of 5.2 percent, a 5 percent growth rate in 2024 means the economic situation will be better.  

Pointing to growth targets of above 5 percent set by several localities so far this year, Li said a growth rate of 5 percent is likely, though there is a "certain degree of difficulty" in reaching such a growth target. Still, Li also said China still has plenty of tools in its policy toolbox, including market reforms, further RRR and interest rate cuts and increased government spending, to ensure a steady recovery in 2024.